Daily Market Commentary

€
The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3595 level and was capped around the $1.3745 level. Technically, today’s intraday high was right around the 61.8% retracement of the $1.4281 – 1.2873 range. Traders booked profits today as the common currency failed to make sustainable gains above the technically-important US$ 1.3745 level. Some of the pair’s weakness was attributable to escalating geopolitical tensions in the Arab world following worsening riots in Egypt. Some traders are speculating President Mubarak will be forced from office, much in the same way there have been popular uprisings in Tunisia and Yemen with lesser ones in Algeria and Morocco. Potential instability in that region of the world could result in higher energy prices due to political uncertainty and to that end, front-month NYMEX crude oil futures are up more than US$ 3.00 today. The European media reported European Union officials are contemplating an extension in the maturity of aid loans to Greece and Ireland to 30 years, a proposal made by European Central Bank member Weber. ECB President Trichet reported “there is no time for complacency” in the global economy. Eurogroup chairman Juncker noted “Many aspects are attached to the permanent stability mechanism. Let’s wait for the summit on 4 February and then the one in March to see what exact shape this permanent stability mechanism will have.” Juncker also noted there are “no plans for Greek debt restructuring” and said “there are no problems with Spain.” French Finance Minister Lagarde today said the European Financial Stability Facility should be enlarged and be permitted to purchase government debt. Data released in the eurozone today saw the December EMU-16 M3 money supply up 1.7% y/y. In U.S. news, data released today saw the Q4 employment cost index up 0.4% while Q4 gross domestic product expanded an annualized 3.2% q/q, but below expectations of a 3.5% expansion. The Q4 gross domestic product price index was up 0.3% and Q4 core PCE expanded by 0.4% q/q. Finally, the final January University of Michigan consumer sentiment indicator rallied to 74.2. U.S. Treasury Secretary Geithner reported fiscal pressures on states are “diminishing” but warned the U.S.’s fiscal path is “unsustainable.” Euro bids are cited around the US$ 1.3220 level.
¥/ CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥82.05 level and was capped around the ¥82.90 level. Technically, today’s intraday low was right around the 61.8% retracement of the ¥80.92 – 83.67 range. Data released in Japan overnight gave traders some sense that the economic climate is improving in that country, including a deceleration in deflationary growth. It was reported that the December jobless rate ticked lower to 4.9% from the prior reading of 5.1% while December household spending was off 3.3% y/y. Provisional Tokyo-area consumer price inflation improved to -0.1% y/y at the headline level and came in at -0.3% y/y at the ex-food, energy level. Also, December national CPI was flat at the headline level and improved to -0.7% y/y at the ex-food, energy level. Economists await additional first quarter CPI data to determine if the decrease in deflationary pressures is sustainable. Other data released overnight saw December retail trade off 4.1% m/m and off 2.0% y/y, both-weaker-than-expected, with large retailers’ sales off 1.8%. Earlier this week, Japan’s credit rating was reduced to AA- by Standard & Poors with the ratings agency warning Japan’s fiscal deficits will remain elevated over the next few years, adding the Democratic Party of Japan lacks a “coherent strategy” to address Japan’s debt problems. Economy Minister Yosano this week reported Bank of Japan “has done all it can do to support the economy over the last two years. It’s wrong to expect too much from the central bank. Some in Japan hold too high of expectations for the impact of the bank’s monetary policy.” Bank of Japan this week reported “Japan’s economy is expected to gradually overcome the deceleration in the pace of improvement and return to a moderate recovery path…(the economy) still shows signs of a moderate recovery, but the recovery seems to be pausing,” a characterization that was unchanged from last month. Earlier this week, Bank of Japan raised its economic growth forecast for the fiscal year ending in March to 3.3% from the previous estimate of 2.1%. Also as expected, the BoJ Policy Board kept the benchmark overnight call rate target range unchanged between 0% and 0.1% and did not announce any plans to expand its ¥5 trillion securities purchase program. BoJ policymakers also now see consumer prices expanding 0.3% in the fiscal year beginning this April, up from the prior estimate of +0.1%. Most dealers do not expect a shift in interest rates by the central bank for at least a couple of quarters. The Nikkei 225 stock index lost 1.13% to close at ¥10,360.34. U.S. dollar offers are cited around the ¥84.60 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥111.50 level and was capped around the ¥113.90 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥129.80 level while the Swiss franc moved higher vis-à-vis the yen and tested bids around the ¥86.90 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan today the greenback closed at CNY 6.5860 in the over-the-counter market, up from CNY 6.5840. Data released in China overnight saw the January MNI Business Conditions Survey move lower to 61.11 from the prior reading of 62.08. Market chatter overnight indicated People’s Bank of China may force the largest Chinese banks to raise their capital ratios to as high as 14% if credit growth is deemed excessive. A People’s Bank of China official today reported China’s trade surplus will narrow to US$ 150 billion. PBoC Governor Zhou today intimated that the currency basket that China utilizes as a reference for the yuan’s exchange rate comprises about ten currencies from developed countries and about ten currencies from emerging market economies. The State Administration of Foreign Exchange today reported Chinese banks purchases US$ 1.3 trillion of foreign currency for their clients in 2010. The central bank is expected to keep the financial system awash in liquidity heading into the upcoming Chinese New Year holiday.
£

The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5825 level and was capped around the US$ 1.5965 level. Technically, today’s intraday low right around the 50% retracement of the $1.6298 – 1.5344 range. Data released in the U.K. overnight saw the January GfK consumer confidence survey worsen to -29 from the prior level of -21. U.K. Chancellor of the Exchequer reiterated having a “credible” fiscal policy provides Bank of England with more options on monetary policy. A Bank of England paper released this week reported the capital adequacy requirements stipulated in Basel III blueprints are “too weak” and indicated the U.K. banking system can withstand tougher capital requirements. It was reported this week that Bank of England’s Monetary Policy Committee voted 6-to-3 in January to not change rates. Two members voted to increase interest rates while one voted to expand the BoE’s asset purchase program. Former Bank of England Monetary Policy Committee member Blanchflower this week reported the central bank sought a weaker pound when he was a policymaker there. Cable bids are cited around the US$ 1.5695 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8585 level and was capped around the £0.8650 level.
CHF
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 0.9400 figure and was capped around the CHF 0.9470 level. Technically, today’s intraday low was just below the 76.4% retracement of the CHF 1.0065 – 0.9299 range. The franc was strong across the board as its safe-haven appeal prompted traders to seek refuge on account of political instability sweeping through some Arabic countries. Data released in Switzerland today saw the January KOF Swiss leading indicator tick lower to 2.10 from the revised December print of 2.11. Swiss data to be released next week include December retail sales, January PMI, and the December trade balance. Swiss National Bank Chairman Hildebrand this week reported “If Europe doesn’t do well, it’s sooner or later a problem in Switzerland as well. We can see with a certain optimism that Europe is tackling the problems.” Hildebrand also noted Swiss economic growth may moderate to +1.5% this year from the estimate GDP growth rate of +2.5%. Swiss National Bank Board member Danthine this week reiterated the central bank’s role is to “ensure price stability.” U.S. dollar offers are cited around the CHF 0.9810 level. The euro depreciated vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.2815 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.4910 level.